Summary Recent price action suggests Bitcoin could be about to follow the path of the rest of the cryptocurrency market lower as downside momentum builds, and key support levels are tested. If Bitcoin's historical correlation with the S&P Cryptocurrency Top 10 Equal Weight Index were to be restored it could see Bitcoin fall in half. The weak use case for Bitcoin, which appears limited primarily to black market transactions, will prevent it from achieving widespread adoption and stability. I have refrained from taking a position in Bitcoin USD (BTC-USD) until now but recent price action across the crypto market looks like the bursting of a bubble, and there is no reason why Bitcoin should avoid another halving in price like most of its peers. Uptrend support on the long chart from the September lows, as well as the previous highs seen in March 2024, are coming into focus on the downside, and below here we could see selling intensity. Bitcoin Log Chart (Bloomberg) Global crypto market cap peaked at around USD3.7trn in December after reaching marginal new highs thanks to expectations of favourable policies under President Trump. While this new high was supported by the surge in the likes of Dogecoin, weakness in smaller coins has resumed, leaving Bitcoin trading at a significant premium and exposing it to further weakness. The following chart highlights how elevated Bitcoin remains relative to the average cryptocurrency. It shows the price of Bitcoin and the S&P Cryptocurrency Top 10 Equal Weight Index. The median index is down 40% from its peak versus just 20% for Bitcoin. Bitcoin vs S&P Cryptocurrency Equal Weight Top 10 Index (Bloomberg) Typically, when Bitcoin has been near its highs as it is now, smaller coins that are more susceptible to speculative sentiment tend to outperform. This is not the case today, and it means that when we look at the correlation between Bitcoin and the equal-weighted index, the former's fair value is around half of its current price. Bloomberg Of course, it might be that smaller coins reverse their decline and move higher to 'catch up' with Bitcoin, or we could see Bitcoin continue to outperform as its dominance over the market rises. However, the risk-reward ratio appears highly unfavourable. No Fundamental Floor The factors that have driven down many of Bitcoin's peers by over 90% are still applicable to Bitcoin. Hopes among bulls that Bitcoin will become more widely adopted as a store of value as it becomes more stable are misguided. Bitcoin's lack of tangible value means that its price will always be subject to changes in the imaginations of investors, and there is no reliable way to identify a floor under which prices should fall. In the case of gold, while it trades at many multiples of where it would if it were merely valued based on its physical use, it nonetheless has physical use by virtue of its use in applications as well as its attractive physical appearance. This, together with its track record makes it relatively stable and accepted as a store of value. In contrast, in the case of Bitcoin, and cryptocurrencies in general, as far as I can tell, their only use is for black market transactions as a means of avoiding the banking system. Its value should in theory in part reflect the amount of money those engaged in black market activity are willing to hold in the form of Bitcoin. If we assume a velocity of money of 1.38x in line with the US, its USD1.6trn market cap would necessitate USD1.16trn in global black market Bitcoin transactions annually, equivalent to around 1% of the world's reported economic activity. Even if you are bullish on the size of the black market, Bitcoin is unlikely to be the sole asset of choice, and as this article shows its market share in illicit activity is on the decline. Summary Bitcoin has held up relatively well in recent weeks even as smaller meme coins have cratered. With downside momentum now building, however, further weakness could intensify. Fundamentally, the weak use case for Bitcoin will keep the cryptocurrency highly volatile, preventing mass adoption and stability.
